Natural Gas

Natural Gas

U.S. Gas Production Seen Sliding for 4 Years

  • U.S. production of natural gas, the most widely used furnace fuel in the world’s largest economy, may tumble through 2012 as low prices prompt producers to shut down drilling rigs from Louisiana to the Rocky Mountains.
  • Energy companies probably will slash onshore U.S. gas drilling to 800 or 900 rigs this year [2009] from a peak of 1,606 in 2008 after prices for the fuel plunged 70 percent from their 2008 high
  • As a result, gas output probably will decline by 3 percent to 5 percent in 2009
  • Idling rigs slows new discoveries and prevents companies from offsetting output declines that average 30 percent a year from established wells

Shale Plays, Risk Analysis and Other Perils of Conventional Thinking: Haynesville Shale Sizzle Turns to Fizzle

A total of 1,966 horizontally-drilled producing wells from the Barnett Shale were evaluated to determine commercial gas reserves using standard decline methods. Based on this analysis, only 30% of Barnett Shale wells will realize revenues that meet or exceed drilling, completion and operating costs in the most-likely case based on assumptions incorporated into a 10% net present value (NPV10) economic model. The economic model includes per-well drilling and completion costs of $3.25 million, a wellhead gas price of $6.25/MMbtu (the average spot sales price for 2007), 75% net revenue interest, 7.5% Texas severance tax, and $1.25/Mcfg lease operating and overhead cost. These assumptions are consistent with information published in 10-K U.S. Securities and Exchange Commission (SEC) filings by key Barnett Shale operators. The model requires per-well cumulative production of about 1,325 MMcfg over 10 years to reach an economic threshold.

An early analysis of 20 horizontally drilled wells in the Haynesville Shale play in Louisiana and parts of adjacent East Texas suggests a disappointing outcome because of extremely high decline rates. Average monthly decline rates are 24%, with 75% of wells declining 20-35% per month. The impressive initial production rates (IP) for these wells do not, therefore, necessarily translate into high reserves (actual daily production rates from the maximum 30-day period were, in fact, about 20% lower than reported IPs). Fifteen Haynesville Shale wells had sufficient production history to analyze using standard rate-versus-time decline methods. Estimated ultimately recoverable reserves (EUR) averaged 1.5 Bcfg, and 67% of wells had reserves between 0.5 and 1.5 Bcf. These results indicate that Haynesville Shale reserves will be about the same as Barnett Shale wells at approximately twice the cost to lease, drill and complete…

Shale plays represent a disturbing tendency in the E&P business away from critical thinking. The belief in reward without risk is irrational. Failure to acknowledge the marginal economics of the play is bewildering. Unless opinion leaders confront the underlying economic and geological risks of these plays, I fear that a financial crisis may develop that will discredit the E&P industry.

Petroleum Truth Report


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